Chapter 6: Cost-Volume-Profit relationships

A break-even point is the level of sales at which the profit equals _____.

Zero

The break-even point is reached when the contribution margin is equal to

total fixed expenses

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit =

Answer: $40,000 -profit = (total sales * contribution margin ratio) - total fixed costs

The calculation of contribution margin (CM) ratio is

Contribution margin / Sales

Formula for contribution margin:

Contribution margin = units of product sold * (fixed cost - variable cost)

True or False: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits

False

The variable expense ratio is the ratio of variable expense ratio to

Sales

The equation that should be used in setting a target selling price for a special order bulk sale that does not affect the company's normal sales is: selling price per unit =

Variable Cost per Unit + Desired Profit per Unit

Using the contribution margin ratio, the impact on net income for a change in sales dollars is

change in sales dollars x contribution margin ratio

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ____________ approach.

contribution margin

Once the break-even point has been reached, the sale of an additional unit will lead to an increase in contribution margin that is _________ the increase in net operating income.

equal to

If the contribution margin is less than the total fixed expenses, a _________ occurs.

net loss

Variable Expense Ratio

total variable expenses / total sales

Net operating income equals:

(Unit sales - Unit sales to break even) * unit contribution margin

At the break-even point

-Net operating income is zero -total revenue equals total cost

Terry's Trees has reached its break-even point and has a contribution margin ratio to be 70%. For each $1 increase in sales:

-Net operating income will increase by $0.70 -Total contribution margin will increase by $0.70

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is

Answer: %34 -contribution margin ratio = (sales - variable expenses) / sales

Tommy's trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will

Answer: Increase $120,000 -change in profits = 5,000 x ($50 - $26)

A company currently has sales of $700,000 and a contribution margin ratio of %45. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will

Answer: Increase by $7,750 -Change in net operating income = ($735,000 - $700,000) x 45% - $8,000

Contribution margin is first used to cover _____ expenses. Once the break-even point has been reached, contribution margin becomes _____.

-fixed -profit

CVP analysis allows companies to easily identify the change in profit due to changes in:

-selling price -cost -volume

Place the following in correct order in which they appear on the contribution margin format income statement.

1) sales 2) variable expenses 3) contribution margin 4) fixed expenses 5) net operating income

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, the net profit will be:

Answer: $100 -($100,000 - $80,000) / 200

Given a sales price of $100, variable cost of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $_____.

Answer: $30 -$100 - $70 = $30. -For every unit above break-even, profit increases by the contribution margin per unit.

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

Answer: $380,000 -Net Operating Income = 30,000 * ($40 - $19) - $250,000

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. The new material would increase variable costs by $4 per unit, the impact on net income would be a

Answer: $450 increase -The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units x $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units x $35), an increase of $450.